The software giant will no doubt feel some pain as companies scale back staff. But its stable infrastructure business will help it weather the storm better than most. Say what you will about Larry Ellison's style, but the in-your-face founder of Oracle knows how to manage a company through a recession, at least so far.
In an economic climate where other companies are heading for the lifeboats, Ellison is skippering Oracle into a position of strength. And it comes down to selling software that relies on a growing stream of corporate data, rather than a growing number of employees.
During a recent conference call, Ellison and his management team were practically optimistic, projecting that overall revenue for Oracle's fiscal third quarter ending in February will be up from 8% to 11% adjusting for currency exchange.
In its most recent second quarter, revenue came in below guidance, with sales growth of 6% (9% was the Street's estimate), but with operating profit margins at almost 46%, above estimates, and pointing to Oracle's ability to maintain pricing power. (Earnings were down slightly for the quarter, a slip Oracle blamed on the strengthening dollar.)
Oracle (ORCL, Fortune 500) is feeling some pain, like every other company out there, but so far it is not as acute. And when you dig into the numbers, it gives you a sense of why Oracle may offer relative safety in these uncertain economic times.
Oracle sells both applications -- human-resources software and customer-relationship software, for example -- and so-called infrastructure software. The latter includes Oracle's core database products, as well as middleware, which acts as a sort of glue between all kinds of software and services.
Applications are generally sold on a per seat basis, so revenue is based on staff size at Oracle's customers. Infrastructure software is sold based on capacity, the number of processors (CPUs) in a server running the software, for example.
The scary issue for a lot of tech companies is of course is one of headcount. As companies cut numbers to weather the recession, they are also cutting the number of seats they need for any number of applications. But companies are less likely to scale back on the efficiencies an automated enterprise can offer them, so that business is not as vulnerable.
Because it is driven by "data, not heads, the (infrastructure) segment should be more stable than other software businesses through the recession," writes Morgan Stanley analyst Adam Holt, who has an "overweight" rating on Oracle, with a 12-month price target of $22.
In that context, data versus heads (or applications versus infrastructure), investors would be wise to look at other software companies SAP and Microsoft, for example, which will be subject to the same forces.
In the second fiscal quarter, Oracle posted database and middleware revenue of almost $3 billion, up 4% year over year. During the same quarter, the applications business was flat to slightly down.
"Oracle's negative year-over-year growth in applications do not bode well for SAP," says JMP Securities analyst Patrick Walravens, who has a "market perform" rating on Oracle. SAP has a very application-heavy product offering. "Our checks so far suggest SAP has already seen some of its larger deal prospects in North America push out."
At some point the economy will recover, and headcount will once again grow. At that point, Oracle will be able to push its applications business harder. In the meantime, unlike some of its competitors, Oracle has the leverage to wring additional revenue from its infrastructure business, and sail -- as it did after the tech bubble burst -- far ahead of the pack.
Author: Michael V. Copeland @ money.cnn.com
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